Natural Gas Pipeline Bottlenecks Lead to Price Spikes in New England

Record cold snap has natural gas prices moving higher.

This article was written by Oilprice.com -- the leading provider of energy news in the world.

As the polar vortex shoots bone-chilling cold air southward into the United States, millions of people are cranking up the heat, and in New England, which has a shortage of natural gas pipeline capacity, prices are spiking. Several snowstorms hit the Northeast over the course of the first few days of 2014, only to be followed up by the coldest temperatures in two decades due to a surge of Arctic air descending into the U.S. Daily high temperatures in the Midwest have failed to get above zero degrees Fahrenheit, with much of the Northeast in single digits. The record-low temperatures have led to a surge in power demand, for which the New England area is poorly prepared.

Natural gas makes up about one-third of U.S. power supply, and 2013 saw a dramatic rise in prices -- more than doubling their spring 2012 levels. Prices increased more or less evenly across the country, except for the Northeast, which experienced severe price spikes during cold snaps, spikes that did not occur elsewhere. The reason is a shortage of natural gas pipeline capacity serving the Northeast, which creates temporary bottlenecks when demand shoots up. The Algonquin Citygate price hub, which serves New England, saw two severe price spikes in 2013 -- prices jumped above $30 per million Btu (MMBtu) in February and in December. The Transco Zone 6 NY, which serves metropolitan New York, also experienced a price spike in February, where it surpassed $35/MMBtu. By comparison, the average 2013 price at Henry Hub was only $3.73/MMBtu.

Some pressure eased on the Transco Zone due to the completion of some pipeline projects, connecting New York and New Jersey to the vast supplies of the Marcellus Shale. The largest project, the New York-New Jersey Expansion Project, brought online enough capacity to carry 800 million cubic feet per day of natural gas into New York City beginning in November 2013. That allowed New York to avoid the painful spikes that New England still experiences -- in November, New England spot natural gas prices jumped above $30/MMBtu while New York's only hovered around $15/MMBtu. The New York and New Jersey markets are expected to add 2 billion cubic feet of capacity this winter alone, with an additional 1.5 billion cubic feet over the next two years.

These high natural gas prices translate into high electricity prices. ISO New England, the grid operator in the region, reported that real-time marginal electricity prices reached $250 per megawatt hour on Dec. 31, 2013. In the mid-Atlantic, by contrast, real-time prices remained between $30-$35/MWh on the same day.

High prices have underscored the need to relieve infrastructure constraints. In December, six governors from the Northeast signed a letter indicating their pledge to cooperate to accelerate the development of transmission lines, renewable energy, and natural gas pipelines. Without much meat on the bones, it remains to be seen what their plan will amount to.

Meanwhile, several utilities are raising their retail electricity rates to cover the costs that they incur when they are forced to buy expensive power on the open market. Connecticut Light & Power announced price increases of 21 percent, rising from 7.57 cents per kilowatt hour to 9.235 cents/KWh. Similarly, National Grid and NStar, two providers in Massachusetts, are increasing prices from 9.334 cents/KWh to 10.035 cents/KWh.